These 7 stocks under $5 are buys — for the right kind of investor

Penny stocks are often dangerous for individual investors. Generally described as stocks with a price under $5, the group usually consists of quite a few fallen angels and growth stocks that haven’t reached, and potentially won’t reach, their potential.

But there are diamonds in the rough. During the financial crisis, several stocks hit penny stock status. Pier 1 Imports (NYSE:PIR) went from 13 cents to over $20 before a long decline the past few years. Dollar Thrifty Automotive bottomed at 60 cents, and sold itself in 2013 to Hertz (NYSE:HTZ) for $87.50 a share.

Those diamonds are more difficult to find in a market near all-time highs, but they’re still out there. Here are seven penny stocks that could provide solid returns for investors going forward.

Best Penny Stocks to Buy: Chesapeake Energy (CHK)

I’ve had an on-again, off-again attraction to Chesapeake Energy (NYSE:CHK) over the past couple years. Chesapeake is still trying to recover from the oil and gas bust that left it with nearly $10 billion in debt and much lower revenues. Progress has been choppy, both for the business and the stock. In just the last 20 months, CHK has moved from $7 to $3 to $5.50 and finally to its current price of $4.70.

Investors need to understand the risks here. The debt is a concern, particularly if oil and/or gas prices start falling again. Earnings reports haven’t been great. CHK sold off after the Q2 release this week, as revenue disappointed. And profits still aren’t covering development costs and interest, making debt reduction difficult.

But there are big potential rewards here, too. The sale of assets in the Utica shale will shave about $2 billion off the debt load. CEO Doug Lawler said that after its strong Q2 results in the Powder Basin, it would replace the lost profits from the Utica acreage within a year. Any move higher in oil or gas prices should disproportionately benefit CHK relative to a major like Exxon Mobil (NYSE:XOM).

In short, CHK now looks like a classic penny stock with high risk and high reward, even if long-term shareholders certainly would prefer that it wasn’t.

Best Penny Stocks to Buy: Castle Brands (ROX)

To be honest, I’m not completely sold on Castle Brands (NYSEAMERICAN:ROX) at its current price of $1.24. And with ROX stock pretty much flat for about nine months now, it certainly seems like the market has determined the stock is pretty close to fair value.

That said, there’s still some good news here, and it’s still an interesting play on U.S. spirits. Castle’s Gosling brand creates both dark rum and ginger beer, which make the increasingly popular “Dark ‘N’ Stormy” drink. The Jefferson bourbon brand continues to grow nicely, with Castle’s whiskey portfolio (which includes smaller Irish offerings) growing revenue 20% in fiscal 2018.

Profits still are slim, but margins are increasing as revenue continues to grow. Management is well-incentivized to continue that growth. And the clear end game here is a sale to a larger spirits company like Diageo (NYSE:DEO) or Constellation Brands (NYSE:STZ, NYSE:STZ.B). If ROX stays on its current trend, it should be able to eventually jumpstart a rally.

Best Penny Stocks to Buy: Sportsman’s Warehouse (SPWH)

Sportsman’s Warehouse (NASDAQ:SPWH) only barely makes this list at a current price of $4.71. But SPWH does look like a nice value here. Investors were concerned about weaker firearm sales after the election of Donald Trump. (Perhaps counterintuitively, firearm sales rise under Democratic presidents and fall under Republican administrations.) A reasonably leveraged balance sheet offered another worry.

But SPWH is lapping the impact of the election, as shown by 3.4% same-store sales growth in its first quarter. A debt refinancing lowers interest costs. And yet, after a recent ~15% pullback, SPWH trades at just 7x next year’s consensus EPS.

There’s a lot to like here, particularly for investors bullish on brick-and-mortar retailers. If those investors like low-handle stocks, all the better.

Best Penny Stocks to Buy: Limelight Networks (LLNW)

Limelight Networks (NASDAQ:LLNW) has executed a nice turnaround of late — and LLNW stock has responded in kind. The internet content delivery provider is a small fish compared to industry leader Akamai Technologies (NASDAQ:AKAM) — but it’s making progress. Revenue has risen 14% in the first half, with non-GAAP EPS more than doubling.

LLNW looks rather expensive on a P/E basis, but margins are thin and EV/EBITDA multiples are favorable. With a recent pullback to $4.31, a continuation of the recent trend should drive upside in the stock.

With Akamai rebounding amid easing of some industry-wide concerns — notably customers like Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB) choosing DIY options — Limelight is positioned to keep double-digit revenue growth intact. That will boost margins and profits — and likely get LLNW out of the penny stock category altogether.

7 Best Penny Stocks to Buy: Plug Power (PLUG)

Clean energy historically has been a graveyard for investor capital, and hydrogen vehicle developer Plug Power (NASDAQ:PLUG) hasn’t been any different. The stock trades well below peaks from last decade, and is down about three-quarters from early 2014 levels as well.

So PLUG’s bull case is a classic “this time is different” argument — which is always tenuous. But there is some good news here. Plug Power has signed deals with Walmart (NYSE:WMT) in 2014 and with Amazon.com (NASDAQ:AMZN) last year. It joined forces with FedEx (NYSE:FDX) in May. The company remains unprofitable, but cash burn is slowing, and the company is guiding for profits in the second-half (albeit with a ton of adjustments; GAAP earnings remain a long way off). Revenue is growing quickly, with gross revenue up 90% year-over-year in Q1.

PLUG has pivoted toward industrial applications — and there is some promise there. Investors in PLUG will have to be patient, have to tolerate volatility and have to accept risk. But if Plug Power finally can gain some traction, the current share price around $2 could move much higher.

Best Penny Stocks to Buy: DHX Media (DHXM)

DHX Media (NASDAQ:DHXM) has had an ugly year so far as a stock, down 35%. Debt concerns and a fiscal Q3 report that disappointed by management’s own expectations haven’t helped. But at $2.10, with a market cap around $300 million, there is some reason for optimism.

First, DHX added the Peanuts intellectual property to its portfolio in a deal with Iconix Brand Group (NASDAQ:ICON). That adds to the existing portfolio of Teletubbies, Inspector Gadget, Yo Gabba Gabba!, and YouTube content provider WildBrain. DHX then sold 39% of Peanuts to Sony (NYSE:SNE), allowing it to reduce debt and bringing a high-quality partner on board.

A strategic review continues, as DHX looks to to further drive cost savings and reduce debt. And in a cord-cutting world where content may become increasingly valuable, the company should have some options.

This is a high-risk play, as the long decline in its chart shows. ICON has dropped over 98% in the last five years due to too much debt and too weak a portfolio. But DHX should be able to avoid that fate — and potentially drive nice gains in DHXM stock.

Best Penny Stocks to Buy: Denison Mines (DNN)

I’m not a fan of mining stocks, as I’ve written in the past. But if investors want to take a stab at the sector, then small, developing miners traditionally offer the best chances for big gains. And Denison Mines (NYSEAMERICAN:DNN) fits that bill.

Denison’s properties are located in the Athabasca Basin, in northern Canada (Alberta and Saskatchewan). It’s targeting uranium resources at its properties — and uranium prices are starting to tick up. The closure of a mine by giant Cameco Corp (NYSE:CCJ) presents a near-term catalyst to those prices — and the discounted fair value of Denison’s mines.

Obviously, there is a ton of risk here. Denison is unprofitable, and likely will need to raise more capital down the line. But DNN actually could provide what mining stocks are supposed to: leverage to the price of uranium. With fundamentals perhaps supporting some upside in the metal, DNN could follow.

As of this writing, Vince Martin has no positions in any securities mentioned.